tv [untitled] CSPAN June 29, 2009 12:30pm-1:00pm EDT
>> how is c-span funded? >> publicly funded. >> donations may be? i have no idea. >> government? >> c-span gets its funding through taxes. >> sort of a public money think. >> maybe, i don't. >> how is c-span funded? 30 years ago america's cable companies created c-span as a public service, a private business initiative. no government mandate. no government money. >> and now a house hearing on executive pay practices and how they may have contributed to the current state of the financial markets. the house financial services
committee hears from obama administration officials about their proposal to regulate executive pay publicly traded companies. barney frank chairs the committee. this is just under four hours. >> the hearing will come to order. i am told that the ranking republican is on his way, so we will begin. we're going to have 30 minutes of opening statements by agreement between the two sides, and i will begin. >> first i want to make a very important distinction that doesn't always get made. we are not here today talking about the pay restrictions that apply to recipients of tarp money. there is his separate set of considerations there. we're talking about entities which receive capital infusions from the government. this hearing today is looking forward as to whether or not there should be built and acted that deal with compensation without regard to whether or not people are taking tartly going
forward. i believe that it is now clear and i am reinforcing that by a number of authorities, paul volcker for example, chairman bernanke, british and the british financial service authority, that the problem with compensation is that it has encouraged excessive risk-taki risk-taking. that is, once we leave the area of the recipient of tarp money, it is not any part of my concern as to the dollar amounts that were given through the governmental standpoint. we are not talking here about amounts. we are talking about the structure of compensation and i believe that the structure of compensation has been flawed. namely, we have had a system of compensation for top decision-makers in which they are very well rewarded if they take a risk that pays off, but suffer no penalty if they take a
risk that cost the company money. now risk is a very important part of this business. we are not trying to discourage people from taking risk. that's not the governments job. but it should not be a system in which risk is artificially encouraged in which excessive risk-taking takes place. now i set out i should correct myself before someone else does, that we were talking about dollar amounts. we are in one sense. i do think there's a problem with the overall compensation but it's not one the government should try to solving any specific way. what we do instead here is to borrow from our english neighbors and competitors, because people say you can have a competitive disadvantage, the system in which shareholders are empowered to vote. a number of my friends are great supporters of shareholder democracy until you try to implement it and say that the shareholders and owners of the company should go. no shareholder should be running a company day today, that's what you have a board of directors. i think evidence is overwhelming
as is the logic. the relationship between board of directors and ceos is of necessity a fairly adamant on going one. they have selected each other. they work together. it simply doesn't work to say that in one or two days a year and this group that worked so closely together will now assume the arm's-length position of labor and management and bargain with each other as if there was that independents. therefore, this is an exception to the normal rule it would seem to be more shareholders ought to have a role. board of directors and ceos are not going to be able to do that i think entirely by themselves. say on pay and tire entitles the shareholders. but what we should do now is deal with the structure which should diminish the extent to which people get these incentives. i must say, i am somewhat puzzled when some of the most influential highly paid people in this country who represent very important institutions come to me and say they need these
bonuses to align their interest with those of the company. why does the ceo of a major banker or investment firm not already considered his or her interest in line with the company is a strange one. they are apparently a pleasantly pleading to some character flaw that says unlike the rest of us they need to be specially incentivized to treat their employers interest fairly. most of us in this society are able to go home without that. that's up to them and their shareholders. but it should not be done in a way that incentivizes too much risk. and i think it is irrefutable that that has happened in the past. i do differ with the administration in that hopes springs eternal and that seems that if we strengthen the compensation committees we will do better. i agree with what they are trying to achieve there. i agree with that statement a goal. i have less confidence in me that they will be able to find compensation committees among these boards that have the independence.
i would go somewhat further. we do agree on the goals and we do agree with the administration on say on pay, and i would say to say this, this is the first of the senate hearings that will leave this committee i hope to bring begin marking up in a month a set of financial regulations that i hope we will have before the house before we adjourned for the summer that will put in place rules about the ride from the message we have learned from the most recent crisis. as i said, we are here not because of concern over the amount of compensation in general, but fundamentally because we think the incentive structure has contributed to excessive risk-taking. the german from alabama is recognized for five minutes. >> mr. chairman, i thank you for hearing this meeting on executive compensation, which is the first of a series on regulatory reform in the future of our financial system. there is no question that there have been some questionable decisions made by some of our major corporations regarding
executive pay their cover, i strongly believe that it is neither the executive branch or congress' role to mandate compensation policies, or the role of this congress or the executive branch to determine who sits on a corporate board of directors or interfere with corporate governance in any way. what we need instead is a strategy to get us out of what we have witnessed in the past six months, and that's government command and control on businesses. we need to get the government out of businesses. and what we need is no further intrusion that what should be private economic decisions made by corporations, their directors and their shareholders. mr. chairman, this series of radio tort reform hearing schedule will, i believe, be among the most important of the committee will be holding this
year and perhaps most important hearings that we will hold in the 111th congress. in these hearings will determine how we will rebuild our financial system and whether we lay the foundation for economic growth and prosperity or whether we repeat the same mistakes that led us to the brink of ruin and those we have made since september. later this afternoon the republican leadership of the financial services committee will unveil a proposal to reform our financial regulatory system. the republican regulatory reform proposal calls for return to market discipline, and to end bailouts, government intrusions, and the business end of the government picking winners and losers. the government plan to address its major flaws in our current system, exposed by the financial crisis. and i look forward to working with my colleagues on both sides of the aisle on this and other proposals for reforming our regulatory system.
over the past years based year, we witnessed unprecedented and into corporate governance. hundreds of billions of dollars have been spent recapitalized in individual financial institutions. some of which were probably insolvent and should have gone into a bankruptcy proceeding instead of being propped up with taxpayer dollars. federal reserve balance sheet is more than doubled, from roughly 870 billion before the crisis to over 2 trillion now. according to remarks made by federal reserve chairman denver naki. in the short run, government interventions may have stabilized the market, but i fear that these repeated multibillion-dollar taxpayer bailout are weakening our financial system and now threaten our economic future. combined with the current administrations borrow and spend fiscal policy, many have come to
believe, including myself, that the vast expansion of the fed's balance sheet is in itself becoming a system at risk to our national economy far greater than the failure of any private financial institution. and also i think fundamentally affects our ability to borrow money and the price at which we borrow that money. to restore our economy we should reject the philosophy that has transformed us into a bailout nation. however, there is some who want to further in trying to field a government policy, by crafting a resolution authority or systemic risk regulator which would give the government, government bureaucrats the power to use taxpayer money to prop up certain financial institutions. we may think that we owned aig, the government, but in fact i think aig and these companies end up owning us.
mr. chairman, the appropriate response to this very real problem of handling market failures is that we should resolve in solid non-bank institutions, no matter how large or systemically important through the bankruptcy system. bankruptcy is a transparent and impartial process with no set of rules and president. and is far preferable to a vaguely defined resolution authority that encourages moral hazard and further entrenc entrs megabanks and other large institutions as wards of the state. in conclusion, it is important for the regulators to monitor the interactions of various sections of the financial system and identify risks that could endanger the stability and soundness of the system, but it is unwise for congress to place the stewardship of our economy in the hands of a super regulator thought to possess superhero powers despite bubbles and excessive risk-taking before
markets crashed. given that we have no way of telling whose forecast will be right and who's will be wrong, in conclusion i would remind my colleagues of the comment made by the fed chairman on march 28, 2007. quote, at this juncture the impact on the broader economy and financial markets of the problem and subprime markets seems likely to be contained. my colleagues know i have the highest respect for chairman bernanke, but in this case he obviously could not have been more wrong. this committee must have the courage to reject calls for new regulatory regime that depends on the infallibility of the government regulators who have so far shown themselves unable to anticipate crisis, let alone prevent them. we must encourage a return to market system. thank you. >> if the gentleman would like to add another minute i would be glad to add that. >> thank you. i appreciate.
>> the gentleman from georgia for two minutes. >> thank you, mr. chairman. i think this is a very, very timely and important hearing as we grapple with the issue of how the compensation structure affects systemic risk. i think, i can understand pay-for-performance, but for the life of me i cannot understand pay without performance. i think that gets to the heart of the matter here. pay without performance. so much of the compensation structure i think is in equitably distributed through salaries and in their bonuses. i think it is within the bone structure that we have to look very carefully at. we are responding to an issue that we did not create here in washington or in congress. this is what was created by over exurban, over eager executives
who were compensated for lack of performance here the bonus structure is setup so that there is a reward system, hopefully a reward system for superior performance. but there is no downside to that. there is no reaction for failure. if we look back at the history of our performance, we will find that many of these executives were rewarded for driving companies into the ground. as we and as the american people observations and are looking at this, multimillion dollar bonuses on taxpayers money, while the american people are just hanging on by their fingernails in an economy where the salary and wage disparity has continued to widen and widened and widened. so if we look at the history and
retrace the unraveling of our economy, there is a very significant role that is out of control compensation packaging of executives have led to a degree of the cost of the problem. mr. chairman, i appreciate this opportunity to to explore this issue further. >> the gentleman from delaware is wrecked nice for two minutes. >> thank you, mr. chairman. i believe we need to be very cautious in the path we are going down. the form of capitalism we have had in this country for decades, generations even centuries at this point has worked well. states have created corporate laws. shareholders elect directors and then directors set to a. obviously there have been abuses in this area and i think we all agree on that. i can agree that the compensation structure could have some affect on systemic risk. does that mean that the federal government step in with legislation and try to correct this, is giving stockholders and
stockholders themselves can be individuals who are not necessarily a person owning 10 chairs or 100 years, but corporations and others who own tens of thousands of shares, mutual funds or whatever. who may not have the true interest of the future of the corporation in mind, other than the immediate profit possibilities. and so as a result of that potential can be dangerous. i think we need to emphasize the stockholders they have a right to change directors. we need to emphasize to our state that they need to have good laws with respect to the ability to be able to change directors. and i thank we need to be very careful in washington. we have gone through a bailout situation. i don't think anybody looks at washington and thinks these people really know how to run things. these are at the executive branch or at the executive branch. and one reason that people are not being penalized because of
losses is because we have a step forward with a bailout. i think we need to be careful about that. i don't think the government intervention is an acceptable in as far as this is concerned so i would encourage all of us to listen carefully because i think there are some good points to be made, to think deeply about what we are doing and make sure that we do not upset something which has a history of working pretty well in this country. maybe we can tweak it that we need to be cautious about how far we go. i yield back, mr. chairman. >> thank you, mr. chairman. i agree with the ranking member that if we have a wrist taker, they should not morph into an agency that would encourage risk or bailout. it should not be permanent tarp. as to tarp, it provides for a appropriate standards of executive compensation. i regret the fact that the administration seems that it will apply this only to those entities that have received three scoops of ice cream. i would think if you read a lot
untrimmed law it should apply to any country that includes even one infusion of tarp funds. the people of this country were outraged at executive compensation. that was not only understandable, it was i able. and it will lead promptly to the return of some $68 billion to the treasury by various banks that they would not have done if it was not for this outrage and a governmental reaction to it. as to the proposals we are considering today, as to say on pay, i believe a lot to look at that being binding, not just advisory. and we ought to set as many of the standards here in this realm rather than just transfer authority to the sec. we are talking about shareholder democracy, democracy starts by legislating by the elected representatives of people, not just granting power to an elected board. there are those that say that corporate boards will exercise the authority, and if they don't there can be shareholder
elections. the process of picking shareholder boards would make you go shove it is a plush. after all, corporate funds can be used in unlimited quantities to back one side and to fight the other. as to the pernicious incentives, i think we're all against an. it will be extremely difficult to design a system where egg executive compensation reflects whether the executive actually help the company and the long term rather than sippy made it look good in the short-term. this will be easier for those who will have companywide decision-making. said they could get in restricted stock in the entire company. but those who would lead to success or failure of a single unit it will be far more easier. i yield back. >> the gentleman from illinois for two minutes. >> thank you, mr. chairman. i'm disappointed that some federal officials are moving in the direction of government to determine pay. notches for senior executives of
the united states companies, but for their secretaries, analysis and the janitor. i think that's a slippery slope, or worse. don't get me wrong. financial criminals must be brought to justice. but most importantly risky behavior in the financial services industry must be addressed. and i think we can do that with smarter, more effective financial services regulations that rain and reckless behavior, risk leveraging concentration of capital. in addition our financial services institutions need to retain the best and brightest. we need not induce fear in our future financial service leaders or workers, but provide them with improved guidelines that foster competition for the benefit of u.s. consumers, businesses, investors and our economy. i yield back the. >> the gentleman from kansas is recognized for one minute. >> thank you, mr. chairman. i want to commend you for your leadership on executive pay issues and holding today's
hearings so we can review how compensation of x. risk-taking as we consider financial regulatory reform. one of the most important lessons i think we can learn from the financial meltdown is that excessive risk-taking and overleveraged activity with little or no oversight will be to instability. as this committee considers financial record form we need to regard against destabilizing activity and identify the proper role of risk in a thoughtful way by improving compensation, risk management and corporate governance rights as. i look forward to hearing our witnesses testimony on these important issues and again, thanks, mr. chairman. >> the gentleman from mr texas. >> thank you, mr. chairman. executive compensation limits to address systemic risk are the wrong remedy for what are probably a nonexistent problem. any compensation legislation considered by congress ought to be driven by two key principles. number one, executives of failed companies who come to taxpayers
with income and hand must be subject to compensation limits. period, paragraph, let there be no doubt. principle number two, except for the first rentable congress has no business setting artificial and mandatory limits on anyone's pursuit of their american dream. if someone aspires to be the next bill gates, oprah winfrey, warned buffet or charles schwab, we should tell them the sky is the limit, go for it. not where the u.s. congress, you will not be allowed to go beyond the 10th floor and oh, by the way take the stairs. i will be the first to admit that many compensation arrangements strike me as risky, illogical, unreasonable if not downright defensive. but the solution to any concerns regarding executive compensation practices is four, number one, the shareholders to vote for a change in management or to take their investment dollars elsewhere. and for congress to re-examine the tax code which probably helps drive a lot of these arrangements in the first place, and even more importantly to
quit bailing out companies who fail in part due to flawed compensation systems. ila, i hope, i hope that in america determines systemic risk is not now being used the way the term internal securities was once used as a former soviet bloc. a justification for almost any and all government intervention. for those who truly want to reduce systemic risk, i suggest they first look to fannie and freddie. i give back the balance of my time. >> the gentleman from indiana is recognized for three minutes. >> thank you, mr. chairman. for your tremendous leadership on the issue of executive compensation and for holding this hearing. this promises to be one of the most important upcoming regulatory reform legislation. recently, there have been a number of interesting characterizations of efforts to reform executive compensation, structures on wall street. in the wake of the worst economic crisis since the great depression, many financial
industry leaders have insisted that ceo compensation is self-correcting. they urge in action on reform insisting that shareholder and media scrutiny has already moderated pay for leader for poorly performing copies. they claim if we enact stronger reforms are financial talent will be overseas and our economic recovery will be delayed. what is missing from that argument is both clarity and reason. for the 175 executives whose companies helped fuel the current economic crisis that ultimately required hundreds of billions of dollars in taxpayer assistance, i believe a capable compensation overseer should have the discretion to determine whether or not these company's compensation packages are reasonable. in any other industry, which someone takes excessive risk that lead to monumental failures, there are repercussions. wall street seems to expect a separate set of rules. froward like incestuous, this double standard is nothing new. they know that 30 years ago ceos
took on 30 to 40 times what average workers made and now that number has exploded to 344 times an average workers pay. they know that while the average ceo pay drop by $1 million last year, many average workers were laid off. they know that the average of bonus payments to wall street executives represents more than they hope to earn over a lifetime. and they know that once again, mainstreet is paying for the actions of wall street. my hope is that industry leaders understand that calls for executive pay reform are not a retaliation for our current economic reality, but rather an attempt to usher in a new hair of a real corporate responsibility. i hope that executives realized that performance incentives that are tied to the long term success and soundness of an institution or a sensual. if we hope to monitor systemic risk and restore confidence in our markets. with that in mind i look forward to working with the administration and the chairman and my colleagues on this
committee. thank you, mr. chairman. i yield back. >> the gentleman from new jersey is recognized for two minutes. >> thank you, mr. chairman. i appreciate the gentleman who just spoke. his comments. and i appreciate the witnesses here today and the chairman that is holding this hearing. today we are export compensation structure and systemic risk. to me as i look at the federal government really is the one opposes a single biggest systemic risk and is really not close. part of the reason the government poses such a large systemic risk is because of the often missed kited government policies you are saying. government officials have a long term track record of success continue to come forward that to 1 degree or another it take to private firms just about how they should properly compensate executives and measure performance. there is surely room for improvement at particular individual companies. putting together compensation practices and to the extent of the discussions today, such as the gelatin as i just made his comments,